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New Study: Stock Market Less Risky Than Social Security
August 9, 2001
Despite its short-term volatility, the stock market is less risky over the
long-term than Social Security, according to
a new study by the National Center for Policy Analysis (NCPA) and the Private
Enterprise Research Center at Texas A&M University.
"Although market returns can fluctuate widely from day-to-day or
even year-to-year, the volatility of the market is reduced to a few percentage
points over long holding periods," said NCPA President John C. Goodman.
For example, over the past 128 years:
- The annual return on stocks ranges from a worst-year drop of 35
percent to a best-year increase of 47 percent. But over investment
periods of 35 years, the return ranges between 2.7 and 9.5 percent.
- The return on bonds ranges from a one-year low of –10.8 percent to a
one-year high of 18.4 percent. But over investment periods of 35
years, the return ranges between 0.6 and 5.1 percent.
"Stocks are a lot less risky than most people think," said Andrew J.
Rettenmaier, one of the authors of the study. Written by three economists
at Texas A&M University, the study concludes that over long periods,
investing in the stock market is much better than investing in bonds or in
mixed portfolios of stocks and bonds.
According to the study, in any 35-year period over the past 128 years:
- The average annual real rate of return for an all-stock portfolio was
6.4 percent, with the lowest being 2.7 percent.
- By contrast, most young people entering the labor market can expect
a return on Social Security taxes they pay of less than 2 percent.
- The study estimates that if a typical worker contributes 2 percent of
earnings to an all-stock portfolio over a 35-year working life:
- During retirement, the average expected return from a private
annuity would equal 43 percent of currently promised Social Security
benefits.
- However, the actual annuity could range from 85 percent to 17
percent of the currently promised Social Security benefit.
How these potential variations affect the retiree’s actual pension
benefit depends on the specific Social Security reform adopted. Every
serious reform proposal limits the downside risk to the retiree. Under most
proposals, retirees would be guaranteed a benefit at least as much as under
the current system.
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